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We are all in this together

We are all in this together – or are we?  The traditional economist view is, of course, yes: we are all part of one big economy, we all have a role to play and the actions of one economic agent will impact on another.  I recall my very first economics class where the concept of the circular flow was explained  – producers on one side paying wages to consumers, on the other side the wages are spent, creating an income for the producers which allows them to pay the wages and all the interaction takes place in the ‘markets’.  To this basic circle, layer upon layer of complexity is added; savings and investment, the role of government, imports and exports, but they remain part of the same, single, economic system.

If this view of a single economy holds, we not only need to be concerned with what is happening in our own little bit of the circle but also what is happening in every other part. So credit defaults in Greece mean the financial markets (banks) don’t have capital to lend to Devon businesses for investing in new machinery or to families to get a mortgage; demand in China determines whether we export or import goods and (as is explained in this quarter’s economic bulletin) how inflation that started in China impacts on families in Devon.

But what if we are not one big economy?  A recent survey undertaken by SERIO at Plymouth University suggests that less than 40% of business in the South West sell into export markets – for Devon it is nearer to 20% of businesses.  So are we really a significant part of the single global system?  Financial markets – epitomised by the stock exchange – are meant to reflect the intrinsic value of the stock they trade. But what if they have become so complicated, so driven by sentiment and speculation that they no longer reflect the true value of business?  Are they now failing to perform the essential function of channelling cash to investment in plant, machinery and tangible assets? In that case, maybe it is not just one big economy and we are not all in it together.  Devon business will sell to Devon customers, employ Devon workers, raising finance from Devon investors. If the economy is so fragmented, will economic growth elsewhere lead to a prosperous, more stable future for Devon? It is hard to tell, but if the circular economy is not a single entity, it is important that policy makers pay as much attention to local economies as they do to the global financial one.

View this article on the Chief Economist's website >